Annuities Celebration Fixed Index Annuities Retirement Income Planning

Retirement Income Visions Celebrates 3-Year Anniversary!

Thanks to my clients, subscribers, and other readers, Retirement Income Visions™ is celebrating its three-year anniversary. Retirement Income Visions™ has published a weekly post each Monday morning, the theme of which is Innovative Strategies for Creating and Optimizing Retirement Income™.

As stated in the initial post on August 16, 2009, Retirement Income Visions™ Makes Its Debut, the importance of retirement income planning as a separate and distinct discipline from traditional retirement planning was magnified during the October, 2007 – March, 2009 stock market decline. Just ask anyone who retired just prior to, or during, this period that didn’t have a retirement income plan in place when he/she retired.

With increasing life expectancies, record-low interest rates, traditional pension plans going by the wayside, soaring health and long-term care costs, and the potential for inflation, retirement income planning is no longer an option. It has become a necessity for anyone who wants to ensure that he/she will have sufficient income to meet his/her expenses for the duration of retirement. Recognizing this fact, The American College launched its Retirement Income Certified Professional™ (RICP™) program earlier this year in which I was one of the first enrollees.

Since its inception, Retirement Income Visions™ has used a themed approach, with several weeks of posts focusing on a relevant retirement income planning strategy. This year was no exception. The weekly posts, together with the customized Glossary of Terms, which currently includes definitions of 137 terms to assist in the understanding of technical subject matter, has contributed to a growing body of knowledge in the relatively new retirement income planning profession.

While the first two years of Retirement Income Visions™ presented a variety of retirement income planning strategies, fixed index annuities, or “FIA’s,” have been the sole focus of virtually every weekly post for the past 13 months. Continuing a theme that began on July 11, 2011 during the second year of publication with Shelter a Portion of Your Portfolio From the Next Stock Market Freefall, the inner workings of FIA’s, including their unique benefits as a retirement income planning solution, has been discussed in detail. As a result, Retirement Income Visions™ has become an authoritative source of information on this important and timely topic.

Although FIA’s has been the theme of almost every post for over a year, the posts have been organized by a number of sub-themes. Following the July 11, 2011 post, the introduction to the FIA strategy continued with the next five posts, Looking for Upside Potential With Downside Protection – Take a Look at Indexed Annuities (July 18, 2011), Limit Your Losses to Zero (July 25, 2011), Do You Want to Limit Your Potential Gains? (August 1, 2011), When is the Best Time to Invest in Indexed Annuities? (August 8, 2011), and How Does Your Fixed Index Annuity Grow? (August 22, 2011).

The next twelve posts, beginning with the August 29, 2011 post, Indexing Strategies – The Key to Fixed Index Annuity Growth, through the November 14, 2011 post, How to Get Interest Credited to Your Fixed Index Annuity When the Market Declines, presented a thorough discussion of the various traditional fixed index annuity indexing strategies. This included an introduction to, and comparison of, the following indexing methods: annual point-to-point, monthly point-to-point, monthly average, trigger indexing, inverse performance trigger indexing, as well as the fixed account that’s included as one of the strategy choices by virtually every FIA.

Moving beyond the base product, the subject of the next nine posts was an introduction to the income rider that’s offered by many FIA’s. The income, or guaranteed minimum withdrawal benefit (“GMWB”), rider is the mechanism for providing guaranteed (subject to the claims-paying ability of individual life insurance companies) lifetime income with a flexible start date that is essential to so many retirement income plans. This kicked off with the enlightening December 5, 2011 and December 12, 2011 posts, No Pension? Create Your Own and Add an Income Rider to Your Fixed Index Annuity to Create a Retirement Paycheck. The introduction to income rider series also included two two-part series, Your Fixed Index Annuity Income Rider – What You Don’t Receive (December 19, 2011 and December 26, 2011) and 5 Things You Receive From a Fixed Index Annuity Income Rider (January 9, 2012 and January 16, 2012).

Following two posts introducing fixed index annuity income calculation variables on January 23, 2012 and January 30, 2012 (10 Fixed Index Annuity Income Calculation Variables and Contractual vs. Situation Fixed Index Annuity Income Calculation Variables), a five-part series ensued revolving around a topic often misunderstood by the general public — premium bonuses. The posts in this series included 8 Questions to Ask Yourself When Analyzing Premium Bonuses (February 6, 2012), What’s a Reasonable Premium Bonus Percentage? (February 13, 2012), How Will a Premium Bonus Affect a Fixed Index Annuity’s Value? (February 20, 2012), How Will Withdrawals Affect Your Premium Bonus? (February 27, 2012), and How Will a Premium Bonus Affect Your Fixed Index Annuity Income Distribution? (March 5, 2012).

The next five posts delved into the inner workings behind the variables and interaction of variables behind the calculation of income withdrawal amounts from FIA income riders. This included the following posts: Income Account Value vs. Accumulation Value – What’s the Difference? (March 19, 2012), How is Your Fixed Index Annuity’s Income Account Value Calculated? (April 2, 2012), How Much Income Will You Receive From Your Fixed Index Annuity? (April 9, 2012), and a two-part series, Don’t Be Fooled by Interest Rates – It’s a Package Deal (April 16, 2012 and April 23, 2012).

When Should You Begin Your Lifetime Retirement Payout? was the subject of a two-part series (May 7, 2012 and May 14, 2012) followed by another timing question, When Should You Begin Investing in Income Rider Fixed Index Annuities? (May 21, 2012).

The May 28, 2012 through June 18, 2012 four-part series, Fixed Index Annuity Income Rider Similarities to Social Security, was a well-received and timely topic. This was followed by a second five-part comparison series beginning on June 25, 2012 and continuing through July 23, 2012, FIA’s With Income Riders vs. DIA’s: Which is Right for You?

The last two weeks’ posts have addressed the topic of valuation of a FIA’s income rider stream. This included the July 30, 2012 post, What is the Real Value of Your Fixed Index Annuity, and the August 6, 2012 post, Why Isn’t the Value of Your Income Stream Shown on Your Fixed Index Annuity Statement?.

As I did in my August 9, 2010 and August 15, 2011 “anniversary” posts, I would like to conclude this post by thanking all of my readers for taking the time to read Retirement Income Visions™. Once again, a special thanks to my clients and non-clients, alike, who continue to give me tremendous and much-appreciated feedback and inspiration. Last, but not least, thank you to Nira, my incredible wife, for her enduring support of my blog writing and other professional activities.

Annuities Fixed Index Annuities

5 Things You Receive From a Fixed Index Annuity Income Rider – Part 1 of 2

As the saying goes, it’s better to give than to receive. With this in mind, the last three week’s posts focused on what you don’t receive when you purchase an income rider with a fixed index annuity, or “FIA.” With Christmas and Hanukkah just behind us as I write this week’s post, it’s time to take a look at what you receive from this optional addition to your FIA.

Let’s start with some basic terminology. Although many life insurance companies refer to it as an income rider, you will also see the phrase, guaranteed minimum withdrawal benefit rider, or “GMWB” rider, for short. The latter terminology is simply another name for an income rider.

FIA income riders are a dream-come-true for a retirement income planner like me since it enables me to offer a unique solution for meeting clients’ income needs that isn’t available elsewhere from other investment products. Specifically, a FIA income rider has the following five features that, when taken as a whole, cannot be duplicated by any other investment:

  1. Guaranteed, subject to individual life insurance company claims-paying abilities, lifetime income or lifetime retirement paycheck (“LRP”)
  2. Flexible LRP start date
  3. Potential for increased LRP amount
  4. Ability to calculate an LRP amount on the date of purchase
  5. Ability to adjust initial and ongoing investment amount to match one’s income needs.

While all features except for #2 are available with other types of fixed income annuities, there are no other investment products that offer all five in one package. The first two features are the subject of this week’s post, with features #3 – #5 discussed in Part 2 next week.

Guaranteed Lifetime Income

A FIA income rider is designed to create lifetime income, or a lifetime retirement paycheck, or “LRP.” Moreover, since it’s being paid by a life insurance company, it’s intended to be a guaranteed payment, subject to each individual company’s claims-paying ability. While this is a wonderful feature from a retirement income planning perspective, it’s one that’s common to all fixed income annuities. As such, in and of itself, it isn’t a unique feature of FIA income riders.

Flexible LRP Start Date

When it comes to lifetime income payments, there are three types of fixed income annuities that offer this: (a) single-premium immediate annuities, or “SPIA’s,” (b) deferred income annuities, or “DIA’s,” and (c) fixed index annuities, or “FIA’s.” The LRP start date for SPIA’s is one month after purchase. LRP’s from DIA’s are deferred to a contractually specified date that can be any time beginning at least one year after date of purchase. Whether you purchase a SPIA or a DIA, your start date is locked in when you make your investment.

When you purchase an income rider with a FIA, on the other hand, your LRP start date is flexible. Furthermore, unlike SPIA’s and DIA’s, you aren’t required to lock in your start date when you purchase your FIA. With all FIA’s, there’s a one-year waiting period between the effective date of the income rider and the date when you may begin to receive your LRP. The effective date of the rider is always the same as the effective date of your FIA contract since an income rider must be added to your contract when your purchase a FIA. In addition to waiting a year to begin your LRP, with most FIA’s, you must also be at least 50 years old.

The foregoing two features, in and of themselves, would make for a very nice retirement income planning solution. As you will learn next week, this is just the tip of the iceberg that distinguishes FIA income riders as a powerful and unique addition to an otherwise conservative investment product with the potential for meeting a retiree’s ongoing income needs.

Annuities Fixed Index Annuities

Your Fixed Index Annuity Income Rider – What You Don’t Receive – Part 1 of 2

As stated in last week’s post, while a fixed index annuity has several unique conservative and desirable investment features, assuming your goal is to create a lifetime retirement paycheck, you need to apply for an optional income rider when your retirement income planner submits your application. As pointed out last week, income riders are currently available with less than 40% of all fixed index annuities.

What exactly do you receive when you purchase an income rider with your fixed index annuity? How does it work? How can it be used as part of a retirement income planning strategy to create a lifetime retirement paycheck?

Before we talk about what you receive when you purchase an income rider with a fixed index annuity, it’s important to understand what you don’t receive. The remainder of this post will begin a two-part discussion devoted to this topic.

In order to understand what you don’t receive when you purchase an income rider with your fixed index annuity, we need to place it in the context of fixed income annuities. A fixed income annuity is the broad class of annuities under which fixed index annuities fall.

One of the unique features that’s associated with a fixed income annuity is the right to annuitize your investment. Per the Glossary, annuitization is defined as the irrevocable structured payout of an annuity with a specified payment beginning at a specified date, paid at specified intervals over a stated period of months or years or for the duration of the annuitant’s and potentially his/her spouse’s and/or other individuals’ lifetime(s) depending upon the payout option selected. That’s a roundabout way of saying that you’re entitled to receive an income stream for a specified length of time.

In addition, when you purchase a fixed income annuity, the timing of commencement of payments can be different, depending upon whether you purchase an immediate or deferred fixed income annuity. With an immediate annuity, payments begin one month after date of purchase. Deferred annuities generally won’t begin making payments for at least 12 months from date of purchase.

Finally, with fixed income annuities, when the income stream as defined by the terms of the annuity contract ends, so does the annuity contract. Unless there’s a refund feature, there’s no accumulation value that’s payable to the annuitant(s) or to his/her beneficiaries.

Now that you have a basic understanding of fixed income annuities, I will continue the discussion regarding what you don’t receive when you purchase an income rider with a fixed index annuity next week when I share with you the unique characteristics of fixed index annuity income riders compared to fixed income annuities in Part 2.